Microsoft streaming in Real's shadow

Despite a three-year campaign to rule the streaming media market, Microsoft is still playing second fiddle to RealNetworks, analysts say.

Microsoft has put considerable resources into developing streaming software--which allows audio and video content to be broadcast over the Internet.

But Microsoft still lags behind market leader RealNetworks, despite previous widespread predictions to the contrary.

Real boasts 70 million unique registered users, compared with an estimated 30 million to 35 million for Microsoft's streaming products, according to the companies. And although estimates differ sharply, most show that the vast majority of streaming content available on the Net comes in RealNetworks' format.

In addition, Apple Computer's QuickTime, the third major player in the streaming industry, last week unveiled a site offering audio and video content from a number of new partners. As QuickTime's strategy evolves, it could bring Apple significant sources of new revenue and pose yet another challenge to Microsoft's attempts to dominate the market.

"In streaming right now, [Microsoft] is a marginal player," said John Powers, an analyst who covers RealNetworks at BancBoston Robertson Stephens. "RealNetworks has put together a distinct strategy and a series of relationships that gives them ubiquity and that has neutralized Microsoft's [operating system] advantage." Two other industry analysts agreed that Microsoft is still far behind RealNetworks.

Not surprisingly, Kevin Unangst, lead product manager in Microsoft's streaming media division, took strong exception, noting recent deals the company has struck with Sony Music Entertainment and about 20 other top content providers.

Although Microsoft appears to have trouble dominating markets outside its core base, the wide reach of its operating system frequently lands the software giant in a competitive position. Windows, which runs on an estimated 90 percent of the world's personal computers, allows Microsoft to widely distribute other products and services. An example is MSN Internet Access, a division of the firm that is dwarfed in size by America Online but nevertheless has garnered a significant installed base of customers.

Microsoft's efforts to rule streaming date back nearly three years, when it took an undisclosed stake in VDOnet, an early player in the market, and landed a seat on its board of directors.

October 1996

Microsoft takes a stake in VDOnet

and gains a seat on its board of directors. VDOnet licenses technology to Microsoft. July
1997
Microsoft forms a partnership with RealNetworks

that includes a $30 million investment. Microsoft licenses RealAudio and RealVideo. August
1997
Microsoft acquires Vxtreme, a maker of compression technology for streaming. The companies decline to release financial details, but a June 1997 email introduced at Microsoft's antitrust trial shows that CEO Bill Gates authorized Microsoft to spend $65 million. February
1998
Revealing cracks in its alliance with Microsoft, RealNetworks acquires Vivo

for $17.1 million. Vivo had been developing software for Microsoft. Work on that project ceases as a result of the acquisition. July
1998
RealNetworks CEO Rob Glaser testifies before the Senate Judiciary Committee

that Microsoft Windows "breaks" his company's RealPlayer. November
1998
Microsoft sells its stake in RealNetworks. March
1999
Microsoft invests $11 million in Audible

and an undisclosed amount in ThingWorld.com. Both companies make e-commerce technologies for Web streaming. April
1999
Microsoft forms its streaming media division, headed by senior vice president Jim Allchin. Less than a year later, Microsoft acquired another earlier player, Vxtreme. The companies declined to release financial details. But a June 1997 email message introduced during the Justice Department's antitrust suit against Microsoft showed that the company was prepared to pay $65 million.

Microsoft's push also included investments in a handful of other companies, including a $30 million stake in RealNetworks that was later divested after the two companies had a widely publicized falling out.

Microsoft has been accused twice in sworn testimony of resorting to underhanded tactics to promote its media software.

RealNetworks chief executive Rob Glaser last July told members of the Senate Judiciary Committee

that Microsoft's Windows Media Player "breaks" his RealPlayer software. A few months later, Apple Computer senior vice president Avadis Tevanian testified at Microsoft's antitrust trial that the company tried to "sabotage" QuickTime by causing misleading error messages to appear when it ran on Windows-based machines.

Microsoft vigorously denies each of the charges, saying the problems RealNetworks and Apple experienced were caused by bugs in the software. In each case, Microsoft hired independent computer labs that verified the bugs. A separate study by Ziff-Davis Virtual Labs also confirmed that programming in RealNetworks' G2 player was responsible for the problems about which Glaser complained. At the time, many predicted the fight was the beginning of the end for Real.

Beyond the charges that Microsoft tried to trip its competitors, Apple's Tevanian also testified in the antitrust suit that Microsoft executives tried to encourage their Apple counterparts not to market a version of QuickTime that would run on the Windows operating system. He quoted Microsoft executive Christopher Phillips as telling Apple colleagues, "We are talking about knifing the baby," a reference to Microsoft's wish that Apple kill QuickTime for Windows.

Adding to Microsoft's challenge is that some analysts and observers say the Windows Media Player at best is only on par with RealPlayer technologically. Plus, sites that broadcast audio and video using Microsoft's technology must do so on Windows NT; RealNetworks' server software, by contrast, runs on a variety of operating systems.

Microsoft has promoted its technology aggressively by dangling cross-promotional deals in front of companies such as CNN, Bloomberg, and CNET in exchange for offering their audio and video content in Windows formats. CNET is the publisher of News.com.

To date, analysts said, Microsoft's extensive efforts--combined with the wide reach of its Windows operating system--have met with only limited success.

Microsoft, for its part, says it is gaining ground on a still-shifting landscape. "This market is just now evolving, and there's plenty of room for some vigorous competition," Unangst said. He added that improved technology contained in the next version of Microsoft's media products, due out later this summer, will "turn the tide" in the battle against RealNetworks' RealPlayer.

Some analysts agree that Microsoft has made important inroads into the streaming market over the past year and is likely to capitalize on the momentum.

"The real story is that most of the large content sights have adopted both [Microsoft and RealNetworks formats], and that is a validation of Microsoft's prowess," said Jae Kim, an analyst at Paul Kagan & Associates. "I don't think there's any doubt in anyone's mind at Microsoft that they're going to throw as much manpower behind this as Real is."

There are also psychological factors at play in the multimedia field that diminish some of Microsoft's traditional strengths, said Mark Hardie, a senior analyst at Forrester Research.

"The drivers behind streaming or more video-oriented content tend to be that small cabal of creative [types], and they're not all that wild about Microsoft," Hardie said. "When your [users] make creative choices, they prefer to use a variety of tools, and it has nothing to do with who uses the most popular tools."